Tuesday, December 22, 2009

OTAs Win in Louisville on Occupancy Tax Issue

This morning, the United States 6th Circuit Court of Appeals affirmed a lower court's motion to dismiss a lawsuit filed by Louisville against the usual Online Travel Agency (OTA) suspects.

Full opinion here for your reading pleasure.

As is usual in these cases, Louisville (and some surrounding areas) filed a lawsuit claiming the OTAs had not paid occupancy taxes based on the rate charged to consumers on their website but rather on the wholesale rate remitted to lodging operators.

The lower Court rejected Louisville's suggestion that the OTAs are not "like or similar" to "motor courts, motels, hotels or inns" because they "have neither ownership, nor physical control, of the rooms they offer for rent." In fact, according to the ruling issued today, the court remarked that the Kentucky laws had "simply failed to keep up with the times."

Of course, Louisville et al appealed this ruling - Today, the court agreed with the lower court's analysis.

A few highlights:

This ruling is a clear rejection of the way the taxation statutes are written today. In particular, the Court ruled that "like or similar" was vague and unclear when questioning if the OTAs were "like or similar" to hotels etc. The Court was concerned about how broadly this "like or similar" verbiage could be construed.

Similarly, the Court ruled that taxes are collected on the "entities doing business as hotels and the like" not the individual occupants of the hotel rooms. As such, the Court rejected counties' suggestion that the amount paid by the ultimate consumer was the amount that should be taxed.

Finally, the Court looked at several other rulings where concern was raised that a hotelier could simply sell all their rooms through a subsidiary of some sort at a very low rate, collect the tax on said low rate and then simply market the rooms to consumers at a higher, marked up price. Thankfully, the Court rejected this claim and suggested that the right place to fix this problem was through legislation, not the courts. They also rightly noted that, in this case, anyway, there is no common ownership between the OTAs and the hoteliers.

This final claim, while positioned as a absurdity, shows the basic lack of understanding of hotel distribution that exists out there. While we doubt the Court has taken any of Bill Carroll's classes up at Cornell, they did a nice job of rejecting this concept which ignores the fundamental ways in which the majority of hotel rooms are distributed - which isn't via OTAs.

Oh, and anyone stayed at a "Motor Court" recently?

Thanks to bluehighwaysofamerica.blogspot.com/ for this great image!

DOT: $27,500 PER PASSENGER Fine for Long Delays. Total insanity.

In what is being heralded as a "Christmas Miracle" by some air travel watchdog groups, the DOT announced new fines for airlines that keep passengers on board an aircraft for longer than 3 hours after departure from the gate.

While we are not advocating that passengers should be kept on aircraft for long periods of time and deprived of basic necessities, we do worry that this arbitrary time limit will have a huge (and negative) effect on how airlines operate during periods of bad weather. Airlines don't intentionally keep people stuck in a tube for hours on end - it is clearly not in their best interests either. And a few of the incidents that have drawn widespread media attention (the Continental Express flight that spent the night on the tarmac in Rochester, Minnesota, for example) are so egregious that we agree something had to be done. But issues like the one in Rochester happened because of utter stupidity and the failure of the crew and airline to properly monitor a nasty situation - not because of malice or profit motive.

The new fine of $27,500 per passenger (which is going to the government, mind you, not the passengers sitting on board!) is arbitrary and capricious. I guess the DOT was trying to send a message, but they might want to check in with the FAA what is a reasonable fine. For example, lets assume a 228 seat 767 sits on the runway for 3 hours and 5 minutes waiting to take off. This would subject the airline to a $6,270,000 fine! In contrast, the FAA recently proposed fining United Airlines $3.8M for flying a 737 on over 200 flights with shop towels covering an oil sump area rather then the proper caps. And most FAA fines are reduced by half if the error is corrected and not repeated. So, a 3 hour delay costs over $6M but 200+ flights with rags in the engine costs ~$2M. This makes no sense. Ont top of that, no compensation goes to the passengers actually sitting on the plane. At least when an airline bumps you (under rules also set by the DOT) the compensation goes to the passenger, not the enforcement agency.

Further, because the fines are so large, airlines will be extra careful in ensuring the aircraft return to the gate in order to avoid these fines. Get ready for your next flight to be sitting in line waiting for takeoff on a snowy evening and after waiting for two hours or so, you head back to the gate. As such, you lose your spot in the queue, maybe the crew goes illegal, bags have to removed etc - you end up stuck in an airport. Some Christmas Miracle indeed.

Net/net, less passengers will make it to their final destination with this new fine.

This is a classic example of the government over-reaching into the operational aspects of a business for reasons beyond protecting the safety and welfare of citizens. Yes, something had to be done to prevent another Rochester, MN but this is not the answer. This is a cheap headline, hardly a "Christmas Miracle."

Thursday, December 17, 2009

AirTran Pinches SI Swimsuit Partnership Away from Southwest

AirTran announced a partnership with Sports Illustrated's Swimsuit edition this morning that culminates with AirTran flying the models from NYC to Vegas after the release of the magazine. Of course there are the usual opportunities for a contest winner to join the models on the flight and more promotional tie-ins are promised. We can only imagine.

But what is interesting about this promotion (beyond the obvious) is that last year Southwest (who had yet to begin service into New York LaGuardia at the time) issued nearly the same press release including a similar flight, contest as well as a new take on Southwest's logo jets - not another Shamu plane. Rather, a full length shot of cover girl Bar Rafaeli. Southwest took a fair amount of heat (others called it a stroke of marketing genius) for the airplane pictured here.

So, was SI too hot even for Southwest, the carrier formerly known as the Luv Airline? And what about SI models flying AirTran - that sounds like worlds colliding. The battle between Southwest and AirTran continues - at least this time it is in NYC rather than Milwaukee.

Facebook and TripIt Get Trippy

This morning, at long last, TripIt announced a Facebook app that allows TripIt users to integrate their itineraries into their News Feed. Much like TripIt's LinkedIn connectivity, it allows users to share their plans (or not) but on a much larger platform.

Not only will your FB friends be able to see when and where you are headed (if you choose to allow them of course) but they'll also be able to suggest places to eat, things to do, people to meet and who knows what else. No longer will I have to update my status: "Just landed in Antananarivo" - everyone will already know.

In TripIt's (cheeky) example below, it appears that people can even schedule a contract review through FB! Is FB on track to take over email/outlook as a primary business communications device as well? Probably not but at least it is now possible to separate "work" friends from all those people you went to high school with that are now your "friends" even though you barely spoke 20 years ago!

Bravo to TripIt.

Thursday, December 10, 2009

Jetsetter Speaks Out at HEDNA on Marketing and Distribution

Jetsetter CEO Drew Patterson was a panelist at this week's HEDNA convention in Las Vegas and had some great insights into marketing, distribution and revenue management.

Drew began his remarks with an observations that what is really missing in the online travel industry today is inspiration. Paraphrasing, the major OTAs are not really about exciting people to travel or getting them to book an incremental trip - they are largely order takers. (My words, not Drew's!)

Drew's comments are similar (but not as blunt) to Harrah's CEO and President Gary Loveman's remarks at this year's PhoCusWright conference during which he lamented that the OTA industry has done little to actually drive tourism and increase trips - most energy (in his opinion) is spent on beating up one another (OTA vs. OTA as well as OTA vs. supplier) vs. actually driving and inspiring consumers to travel (and stay in his hotels, obviously.)

Drew also commented on the often difficult relationship between Revenue Management and Marketing within the hotel industry. In Drew's words, "RM and marketing have to work in partnership to stimulate activity. Lowering rates without communicating the price change just dilutes an existing customer base. At the same time, marketing communication without value or a reason is a waste of money because consumers will see through it. The two have to be integrated to have an impact." Sage advice for hoteliers and distribution partners.

Clearly, Jetsetter aims to solve for these issues, but they alone can't be the total answer for what ails the industry today. (Drew has big plans but it is a big world out there.) Will anyone step up in 2010?

Friday, December 4, 2009

Lodging Recovery: 4 Years Away, OTAs vs. Suppliers, Google vs. TripA and Other Good Discussions

Check out the blog over at uptake.com for some good thought-provoking discussions following the PhoCusWright conference down in Orlando.

Yen does a nice job of explaining Bill Carroll, Chris Anderson and Jake Fuller's analysis of the lodging cycle and the opportunities for the OTAs. In a nutshell, look for another 4 years of pain for hoteliers and substantial continued opportunities for OTAs.

Solid musings on the potential GDS IPOs along with HomeAway, Kayak and ITA - should be a big year in travel IPOs

And what would a travel discussion be without thoughts on google and tripadvisor?

Catch all the details here including my thoughts on OTA vs. supplier.com innovation and growth. The reply below is in response to Yen's thoughts around the growth of OTAs during the last economic blip - good supply helps but innovation is critical as well:

I think the question is as much around supply vs. demand as it is innovation vs. the lack of it. Hotels.com and Expedia built their businesses just as much around great pricing as they did around great websites, content and functionality. The chains and airlines fought back and brought their sites (somewhat anyway) up to snuff. But, particularly for airlines, they have relied on booking fees charged by the OTAs as a crutch to create differentiation. With those fees now moot, is it any wonder why consumers, for the same price, aren’t booking where a better booking experience happens – the OTAs? No wonder OTA air segments are way up – which obviously feeds the hotel and car lines of business. The innovation pendulum has swung squarely to the OTAs from the suppliers. Just look at Orbitz Price Assurance for air and hotel or Travelocity’s Guarantee or Expedia’s packaging product to see how the OTAs are changing the game. The suppliers are nowhere in these customer friendly areas. Will the airlines fight back with more negatives (as they are sooo prone to do) by restricting seat assignments or frequent flyer mileage accumulation to their own websites? (Remember when hoteliers did this?) Or will they match the innovation of the OTAs and really attempt to compete? We’ll see next year."

Tuesday, December 1, 2009

Is Allegiant Air Feeling the Heat From AirTran?

Allegiant Air, which has long operated exclusively from Orlando Sanford Airport, today announced that ten destinations will now be served from Orlando International Airport.

Normally, we would not consider this to be very interesting news except that we've been following the growth (or dare we say copy-catting) of AirTran from Orlando International Airport (MCO). AirTran has added significant new service over the past several months from MCO which closely follows Allegiant's strategy of operating less than daily (2-4 weekly frequencies) in under-served leisure markets such as Bangor-Orlando, Duluth-Las Vegas and the like. We doubt that AirTran hast been able to build the kind of vacation packaging revenue that Allegiant depends on, but clearly Allegiant decided they needed to compete on more equal terms.

Allegiant is moving markets where they directly or closely compete with AirTran to larger and more conveniently located MCO. These include: Allentown, Knoxville, Lexington and Des Moines where they fly wing-tip to wing-tip with AirTran as well as Greenville, Grand Rapids, Springfield MO, Tri-Cities TN, Huntington WV, and Youngstown where Airtran operates nonstop service to MCO from cities within a very easy drive.

Allegiant's press release says customer preference for MCO drove the decision but we see it really as a way to put pressure on AirTran. And AirTran is pretty good at picking fights - they have proven they can succeed in Delta's back yard in Atlanta and are waging a huge war in Milwaukee with Midwest and now Southwest. Even Northwest, which has a history of not tolerating LCC's in their hubs was not able to drive AirTran from Minneapolis, Detroit and Memphis. This will be fun to watch...

Wednesday, November 18, 2009

FlightSearch.com: An Interesting Twist on Search Aggregation

Does the world really need another search aggregation website? Well, we are about to find out. FlightSearch.com has gone live (in beta) with an interesting approach to searching multiple travel sites.

Unlike some other players such as TripAdvisor's bookingbuddy.com, TravelZoo's SuperSearch, FlightSearch searches multiple sites without opening window after window after window as each separate site is searched. Users are able to simply tab between results from Priceline, Orbitz, CheapTickets, Vayama, Kayak and others. (Does Kayak's inclusion make FlightSearch a meta of metas?) FlightSearch is a really nice take on an oft-copied model. And not a bad URL either.

FlightSearch is led by travel industry vet Ted Perlstein (full disclosure: Ted worked for me at Starwood as a summer intern once upon a time - he probably considers it a dark period in his career) who has also has been at Orbitz and once upon a time, carried a business card with the title of "Head Sherpa" when he was at an earlier incarnation of lastminutetravel.com

As we mentioned, FlightSearch is still in beta so there are a few things we'd still like to see improved, but we'll be watching to see when other OTAs (and metas?) join up. And how about a few suppliers? Where are you American and United et al? Obviously, driving traffic in this hyper-competitive space will be a challenge but we like the approach Ted and team are taking...

Tuesday, November 17, 2009

Buy your hotel room or car with SkyMiles at Delta.com

While trolling around Delta.com this afternoon looking to burn some of our hard-earned SkyMiles we came across a new (or re-launched) feature called the SkyMiles Marketplace. SkyMiles members can search for hotels and cars and then use SkyMiles to pay for some or all of the cost of the room or rental. The redemption rates can be a little dear but hey with air redemptions getting harder and harder, it is nice to have another option - particularly one without capacity controls and the like.

A little sleuthing shows that this is another website powered by ezRez. ezRez has been on a terror of late, launching similar pay with miles/points programs with the likes of Starwood, IHG, and United.

One of the coolest features is the slider bar that allows members to choose the mix of miles to cash they want to pay for the hotel or car.

At the rate we've been earning miles lately, it is great to have another way to burn them that doesn't rely on the whims of revenue management!

Monday, November 16, 2009

Planet Hollywood Hotel Mirrors JetBlue's All You Can Jet Pass

Over the weekend, we noticed an interesting promotion from the Planet Hollywood Hotel in Las Vegas that reminds us of JetBlue's wildly successful (at least on the PR side) All You Can Jet Pass.

The Planet Hollywood "Phanatic Pass" offers consumers any ten nights between now and March 15th for $599 - in other words, just 59 bucks a night. Whats more, it is even valid during some of the biggest weekends in Vegas such as New Years Eve and Super Bowl Weekend. A quick check of the non-promotional rates shows the Planet Hollywood selling regular rooms for $310 on New Years Eve so the savings are huge if you are (or want to become) a regular in Vegas. What is more, the PH is waiving the resort fee that normally applies (don't get us started on resort fees - they are worthy of another diatribe.)

Obviously, Planet Hollywood is hoping for some breakage on this one, but we like the creativity they are using to generate buzz and interest. And if the goal is to keep customers coming back to the hotel and get them gambling, eating, drinking and hitting the shows etc, this is a pretty cool way of generating repeat business. We bet (as we've seen with hotel loyalty program redemption) that people staying on this deal will have a higher incremental spend than average. The logic goes that people who think they scored a great deal (or used points) on the room will be more inclined to spend on F&B etc.

More details on the PH deal here

Wednesday, November 11, 2009

Expedia and Choice Hotels Kiss and Make Up

Expedia (EXPE) and Choice Hotels (CHH) tonight announced they have signed a new, long-term deal that will return Choice's inventory to Expedia's global family of websites including Expedia and Hotels.com. The three year term is even included in the press release but maybe that is standard for a deal negotiated in the press.

More of note, the jointly issued press release begins with a quote from Dara Khosrowshahi, CEO of Expedia Inc, that makes it very clear to anyone wondering about the deeper issues of the dispute (LRA and rate parity as we discussed here) as where the two sides ended up: "We’re pleased to be working with Choice in an agreement that respects the guiding principles which we operate under." In other words, Choice agreed to similar terms that everyone else has: coup averted.

Choice Hotels CEO has a line as well but not nearly so telling: "Choice Hotels and Expedia worked together to establish a new agreement that is mutually beneficial and enables hotels in the Choice system to effectively manage their businesses."

Glad this thing is over - relationships negotiated in the press are never positive for either side. A public spat like this does little for the industry (hoteliers or OTAs) and takes the focus away from what everyone should be concentrating on in times like these - generating revenue.

Thursday, November 5, 2009

Expedia drops phone booking fees

Expedia announced today that they are removing booking/service fees on all travel products sold through Expedia's call centers.

From an airline perspective, the move is interesting in that it will now be cheaper for consumers to book with an OTA then calling the carrier directly. (Except, of course, for Southwest which does not charge extra for a call center booking but they don't participate in the OTAs anyway.) The move is another example of how the OTAs have continued to differentiate themselves from the suppliers in terms of service, functionality and price. The list of enhancements the OTAs have made this year is long and compelling and great for consumers. Just to tick off a few: Orbitz TLC, Orbitz Price Assurance, Expedia's SeatGuru reviews, Priceline's iPhone app all come to mind.

And what of the timing, by the way? Interesting that Expedia announced this change the same morning as Orbitz announced earnings - particularly when Orbitz had this say in their statement: "This net revenue decline was due primarily to the removal of most air booking fees and the significant reduction of hotel booking fees on the company's domestic websites, as well as a decline in average hotel room rates globally."

Today's move by Expedia along with the OTAs' other enhancements this year should be a wake-up call for suppliers - Airlines and hoteliers cannot continue to sit still while they are out-innovated by the distributors. Piling on more fees or other dis-incentives for booking through specific channels only further harms the supplier's brand and the overall customer experience. Suppliers, wake up!

Wednesday, November 4, 2009

Expedia Billboard Effect: Cornell agrees that it is real

Expedia and other OTAs have long touted what has become known in the industry as "the billboard effect" whereby they have claimed that positioning on their sites generates not only bookings through the OTA but also a halo effect on the hotels' own sites by generating brand awareness. Non-loyal consumers start many of their searches at an OTA to gain a perspective on the options available, relative costs and positioning of the hotels in a given market against one another. Then, they often check other sites to compare pricing - usually including the website of the hotel they are interested in.

Personally, I saw strong evidence of the billboard effect while I was at Starwood and Expedia has long claimed that for every booking generated on Expedia, another booking is generated on the hotel's own website.

In a new whitepaper, Cornell assistant professor Chris Anderson has measured the billboard effect with a several branded and unbranded hotels. The results are striking, particularly for the independent hotel in the test.

For the study, Prof. Anderson worked with Expedia and JHM Hotels, an ownership group with hotels under the Starwood, Marriott, Hyatt and Hilton flags to cycle specific hotels on and off of Expedia over a three month period. That is, the hotel was listed at the top of the search results when the hotel was participating on Expedia and and removed altogether from search results listings when the hotel was dark on Expedia. By the conclusion of the study, each hotel was listed on Expedia for 40 days and dark for 40 days.

The results are below:

According to the study, the hotels saw a boost in reservations ranging from 7.5% to as much as 26% for the inde hotel when they were listed on Expedia vs. when they were dark.

Prof. Anderson suggests that the branded hotels may not have seen as large of a boost because when consumers go the brand websites they are presented with other "in-chain" hotels, e.g they are searching for a Marriott but upon arriving at marriott.com they are presented not only with the Marriott they saw on Expedia but also a Courtyard where they may actually end up booking.

We'd like to see an expanded test at some point with some slightly different parameters. For example, what happens if the hotel isn't listed at the top of the search results on Expedia? Could the brand numbers be further refined if the test was conducted in markets without sister hotels nearby? What would the results look like for resort hotels? How did the booking curves differ? And the cancellation rates? Could leveraging the billboard effect actually be cheaper than buying google key words? And of, course, what do the bottom line ROIs look like after all distribution costs are taken into account. Those questions may be ripe for another study - any of you OTAs or chains reading ready to sign up? Lets talk....

Tuesday, November 3, 2009

Florida AG sues Expedia and Orbitz - If cities can, we can too

Bill McCollum, the Florida Attorney General filed suit against Expedia and Orbitz this afternoon, opening the next chapter in the ongoing fight over occupancy taxes. Florida is the first state to take such a step - all of the previous actions have been filed by cities or groups of cities in a specific state.

It is not clear why the suit was only filed against Expedia and Orbitz - in the past these actions have usually been taken against all of the major OTAs including Priceline and Travelocity, among others.

In reading the actual complaint, there does seem to be some confusion in how the merchant model actually works.

For example, in Section 9: "each Defendant purchases and receives inventories of hotel rooms at negotiated rates from the hotels." and "re-sells the rooms to consumers at rates determined by that particular Defendant." Lets take a look at these two statements. Does Expedia, in most cases anyway, actually purchase a block of rooms and hold the inventory? No, not since the early days of Hotels.com - most, if not all, rooms are not purchased and held in advance. As far as determining the rates paid by consumers, again, certainly in the case of the chain hotels, the OTAs are not setting the prices - the chains are through their contractual agreements.

The AG claims that the OTAs are using a "purchase and resale" model which just isn't the case.

The big issue is that the model roughly described by the AG has been in place long before the Internet came around - how do they think all those rooms at Disney World are filled? Thousands of rooms are sold every night in Florida under the wholesale model - I bet more than in any other state in the country except for maybe Nevada. These wholesalers also remit the taxes back to the state based on the wholesale or net portion of the room rate, not on what the consumer actually paid for their package which may include Disney tickets and plenty of other things also bought on a wholesale basis.

Texas Cities vs. PCLN, EXPE, OWW et al: A Draw at Best

Late last week, a jury in San Antonio delivered a verdict on a class-action suit against the major OTAs that was brought by around 170 cities in Texas. The verdict against Expedia, Orbitz, Travelocity and Priceline is for $20M plus court imposed penalties and interest.

While this sounds dire, (and if you read the lawyers press release you would think this was a slam-dunk) a detailed analysis beyond the headlines should give the edge to the OTAs. Why?

First of all, the jury rejected the municipalities' claims that the OTAs willfully pocketed tax dollars that were collected (as taxes) from consumers. This precedent setting verdict finally makes it clear, once and for all, that the OTAs are not collecting taxes and pocketing it - a position that many of the other lawsuits have taken and one that was sure to ring true with juries, particularly in this day and age. The "tax and pocket" position was a highly emotional stance that anyone who truly understand the true economics of the merchant model would obviously reject. Yes, taxes and fees have long been bundled together but the spirit and goal was clearly not to defraud consumers or rob cities and towns of tax dollars - the intent was to protect the underlying contractual agreements around margins.

Secondly, the jury rejected punitive damages against the OTAs because they agreed that the OTAs were not, in fact, pocketing tax revenues. Obviously, this is a no-brainer.

Interestingly, the jury did find that the OTAs "control hotels" and therefore are required to remit the occupancy taxes required by hotel operators. Knowing more than a few hotel General Managers, I can't imagine a statement that would boil their blood faster (except, maybe to say that "corporate" controlled their house!) than to say an OTA controlled the hotel. By now, everyone knows that hotels set pricing, inventory, discounts and room allocations either on the fly or during negotiations with the OTAs. The OTAs then re-market those rooms that have been offered to them to sell. This is hardly control. Furthermore, the hotel is clearly in control of the guest experience - after all, it is the hotel that decides which rooms to allocate to specific guests and who to "walk" when things go wrong.

Lastly, we believe the jury's definition of "control" may expand well beyond the OTAs. Put in the context of the ruling, traditional tour operators control rooms as well. Traditional tour operators (which pump a lot of rooms into Texas resort cities) have always paid the occupancy taxes based on the net rate of the room, not the gross selling rate. This has been going on long before the Internet and the OTAs came along.

Bottom line: if Expedia and the like are hiring, firing, allocating capital, negotiating with unions, customers, franchisers and managing to get the beds made and the bacon crisp, we'd agree that they control the hotel. Last I checked, these functions were not part of the OTA business model.

Thursday, October 29, 2009

Expedia and Choice Hotels: Spencer Has His Say

In Part Two of our Ghosts of the Internet Past interviews, we caught up with former Expedia executive Spencer Rascoff. Spencer is now the Chief Operating Office of real estate website Zillow.com but was ran hotel supplier relations during the IHG/Expedia stand-off six years ago. Prior to Exedia, Spencer and I worked together at Hotwire.com where Spencer ran the hotel side of that business and I brought him coffee and donuts.

TomBotts: “Spencer, first off, do you miss travel?”

Spencer Rascoff: “Well, of course I miss travel. Real estate is fun – things are going very well here at Zillow. But I still follow the travel industry closely – several of us who were at Expedia during the IHG smack-down have been emailing back and forth and reliving the old days.”

Tom: “So, has anything changed this time around in your opinion?”

Spencer: “The biggest change is that the suppliers have developed much stronger direct selling capabilities. Six years ago, the brand sites were pretty much second class sites. That has changed radically. The brand sites are a lot more reliable alternatives to the OTAs now and the brands have developed tactical marketing capabilities to successfully drive traffic directly.”

Tom: “When it comes to the current breakdown between Choice and Expedia, what you see as the major issues based on what you know?”

Spencer: “It seems that the negotiations are almost exactly the same as they were six years ago - you can copy and paste “IHG” for “Choice”. So little has changed. Amazing that the industry has changed so little that they are arguing about the same 3 issues – LRA, sell rate and margin – it’s been the same for ten years!”

Tom: “Does it make a difference this time around that it is Choice rather than IHG?”

Spencer: “In my opinion, IHG was more important in 2003 than Choice is to Expedia in 2009. I would give the edge to Expedia in this bout. The dirty little secret out there in the OTA space is that they don’t really need all hotels for leisure consumers. They need to have a good mix of star levels and locations but they don’t need every single hotel for this customer base. The OTAs are focused on the key cities that make up the bulk of their business and there are several key properties – about ten or so in each that are fundamental must-haves. For example, you can’t sell hotel rooms in New York and not have the Waldorf=Astoria. IHG has (or had) many of these key assets – I’m not convinced that Choice is in the same position of strength and brand power.

Tom: “Does an OTA need to have all hotels for business customers?”

Spencer: “Yes, business travelers are a different breed – they book much more on location, loyalty program, habit and of course negotiated rates. If all of a sudden the hotel where their company has a negotiated rate is gone this presents a major issue for the supplier, the company, the TMC and the traveler.”

Tom: “So when IHG pulled GDS inventory from what was Expedia Corporate Travel (now egencia) how big of a deal was that?”

Spencer: “It was a nuclear bomb – we didn’t see it coming and it took us and our mutual customers by total surprise. It was the one thing that really brought Expedia back to the negotiating table. I don’t think Choice has the same amount of leverage, however. Their hotels are just not as important to the corporate travelers that use a booking tool as the IHG properties were and are.”

Tom: Any other key levers you see either player having in this game?

Spencer: “The other lever is understanding how much control the franchisor has over the franchisees when it comes to distribution. Negotiating with IHG was a three legged stool between corporate, the owners and Expedia. Jim and IHG did a great job of ensuring that the franchisees would toe the corporate line. The franchisees were unhappy but IHG was really effective at keeping them in line. I’m not sure Choice has the same power.”

Tom: “Do you think Choice can replace the demand through other channels?”

Spencer: “It will certainly be easier this time around but it is still really hard. One key fact that is hard to ignore is what we used to call the ‘billboard effect.’ I’m not sure what the recent research shows but we found, back in the day, that for every booking that occurred on Expedia.com, the supplier site generated a direct booking as well. Consumers were exposed to the hotel on Expedia and then went off to book it on the supplier site. This demand generation is nearly impossible to replace.”

Tom: “Yes, we saw similar results in testing when I was at Starwood. So, does the lack of Choice hotels really hurt Exedia?”

Spencer: “I highly doubt Expedia’s conversion will take a hit. Consumers just book a similar hotel from a different brand. Now, this would not be the case if we were talking about a key marquis property – but for run of the mill hotels, consumers simply book something else.”

Tom: “Any parting thoughts?”

Spencer: “Well, in my mind, the wild card here is really egencia. It is very difficult to grow that business if potential customers see the TMC as at war with the suppliers. I’m not sure where things stand between egencia and Choice, but it is certainly Expedia’s Achilles Heel in this negotiation.”

Choice Hotels and Expedia: Former IHG Exec Jim Young Strolls Down Memory Lane

As we discussed earlier, all of the relevant parties to the last major public flare-up between an OTA and a major brand (Expedia and IHG) have moved on to new challenges. However, we’ve tracked the two key witnesses down, and they both have agreed to discuss the current situation between Choice and Expedia. First, we are talking with former IHG SVP Jim Young. We’ll follow shortly with a discussion with Spencer Rascoff, former VP of Supplier Relations at Expedia, and now COO at Zillow.com

Tom Botts: “Jim, you lived through a similar situation a few years back when you were with IHG. What has changed since you went to the mat with Expedia?”

Jim Young: “It feels like the industry hasn’t learned a thing. Suppliers seek leverage in the good times when demand is high and Distributors take advantage when demand is low. I suppose you could argue that is just capitalism, but it sure isn’t sustaining and somewhat unproductive”

Tom: “Is the landscape still the same in your opinion?”

Jim: “Some things are different. I think there is greater price transparency and channel awareness with meta-search now in the mainstream. Hotels have greater ability to communicate with customers through social networks like Twitter and Facebook. Finally, I think that both hotel companies and OTAs have done a better job establishing their brand position in the market.

Tom: “Talk about the role of hotel brands in this puzzle”

Jim: “Hotel brands are in the business of franchising their trademarks, providing development and marketing expertise, as well as reservation services. They make money by charging fees, normally based on a percentage of total rooms’ revenue. Hotel owners sign franchise agreements in order to be part of a bigger system. It gives them access to services and scale they either can’t get or are too costly to procure on their own. As far as room distribution is concerned, the brand represents all their system hotels and negotiates the participation terms with all major travel sellers, offline and online and processes them through the reservation system. Some brands have very strong franchise agreements that clearly establish the brands rights to set the terms of these agreements. Other brands are just glorified representation companies with minimal design, quality, and compliance standards.

Tom: “What is the power of a brand in your mind?”

Jim: “A hospitality brand is a lot more than just the sign, the room decor and the attitude at the front desk. The brand is the market power you give to hotel owners to sell rooms. That is what it is all about, after all. If you are a 200 room hotel in a big city crowed with many competing properties or an 85 room hotel at an interstate exit with 5 other hotels on the same strip, having a strong brand is a big deal and it helps you beat the competition. If, however, an owner perceives that they can get better marketing, distribution and reservation production by going direct to the distributor, then the brands value starts to diminish. That is what keeps franchisors up at night. If they are not perceived as a strong well marketed brand, then they can’t grow their system”

Tom: “So, why now? Why is this fight happening at a time when most hoteliers are pretty happy to get any revenue at more or less any price?”

Jim: “Like I mentioned earlier, I don’t think the industry learned anything from the last exercise. The cyclical nature of the business constantly creates winners and losers in contract negotiations. Expedia’s timing is dubious – kicking hoteliers when they are down is a tough card to play. Choice and Expedia were operating under the previous terms of their agreement which had, apparently after a number of extensions, expired. It sounds as if Expedia saw an opportunity to bring Choice’s corporate agreement into the realm of what they claim is their accepted norm with other chains. Both would have been better served to build an agreement that would survive the normal cyclical nature of the business – building an agreement that survives good times and bad for both.”

Tom: “And so what of Expedia’s attempts to bypass Choice and go directly to the owners/franchisees?”

Jim: “As you said in an earlier post, ‘we’ve seen this movie before.’ It is exactly what they attempted with IHG. We had tough guidelines in place that prevented our franchisees from deviating from the corporate strategic position. I’m not sure if Choice has those same standards in place. Going directly to the hotels is disingenuous if you really want to do a deal at the chain level. Expedia could drop a whole bunch of market managers if they focused on the chain level relationships rather than focusing on the hotels.”

Tom: “Choice has talked a lot about other efforts they are pursuing to replace the lost revenue from Expedia. Steve Joyce has placed the number at around $100M per year – not a small number given that it probably flows to a disproportionate number of hotels. You worked hard to replace the business you lost when you were dark on Expedia – did you make it up?”

Jim: “Well, we came pretty close. I can’t share exact numbers of course, but we were able to leverage some other key strategic partners to drive some pretty impressive numbers which demonstrated to its hotel owners the power of its brand system."

Tom: “So, could you have driven those numbers and retained the Expedia business for a net overall share gain?”

Jim: “Great question – the answer is probably somewhere in the middle. Some things are only possible when you switch allegiances and create the burning platform that forces everyone to react to the change – just look at Continental and SkyTeam vs. Star! I’m sure Continental will get an early benefit from being a full partner in such a large alliance.”

Tom: “Old airline guys (myself included) never get the Jet A out of our veins, do we? What is the net net of this situation?”

Jim: “I think, in the current state of mind of both hoteliers and OTAs, that this will end up as a giant, zero-sum game for both. Expedia will look a little less complete when their customers realize that Choice’s 5000+ hotels are missing from the display and Choice won’t have access to Expedia’s distribution reach. Something has to change.”

Tom: “What needs to change in your opinion, Jim?”

Jim: “I think there is a balance somewhere out there. In market segments where Choice has a strong brand presence and can easily tap the demand directly to their website, they don’t need to rely on the OTAs as much and should focus their efforts there. However, where Expedia can demonstrate that they can more cost effectively merchandise and deliver a room reservation to a hotel in a market that Choice is not as strong in or not targeting directly, then Choice should find a way to pay for that value delivered.”

Wednesday, October 28, 2009

Best Western Makes the Same Expedia Choice?

Hotel News Now has an interesting story describing the recent Best Western owners meeting. According to the story, Dorothy Dowling, Best Western's SVP of Marketing and Sales asked the members in attendance if they would be willing to join Choice in the fight against Expedia by pulling their hotels from the site. According to the story, applause rang loudly from the attendees.

Now, before this becomes a conspiracy against Expedia, lets examine the facts. Best Western, by the nature of the business model, does not have the power over its membership that IHG or even Choice Hotels has - they can't force their members (not franchisees, mind you) to actually toe the corporate line as IHG did six years ago.

And of course the hotel owners are opposed to the terms which Expedia is asking for - who wants to give up 25% of revenue per booking? The question is, can they make it up elsewhere?

Best Western suggests working with "receptive tour operators and other online travel agency partnerships" to drive revenue instead of relying on Expedia. Fair enough, but IHG and Choice would both say it takes a lot more than looking at other channels. And we've never seen a receptive that offers lower (or more flexible) margins than an OTA. As for looking to other OTAs - it comes down to size and scale. And for better or worse, Expedia has everyone beat in both categories.

So, is Best Western ready to step up and drive revenues direct? This is the true power of the brand.

Virgin America Answers "The Whats in it For Me Question" of Social Networking

Virgin America has launched a new program via email tonight that offers members of Elevate, Virgin's Frequent Flyer program, 20% off their next flight. The 20% off offer isn't new - Virgin has been sending these out like candy over the last year.

What is new is that there is (finally) something in it for the email recipient who forwards the 20% offer to friends, facebooks (is that a verb?) it or blogs about it. (Yes, guilty.)

VA is offering a free round trip for members who pass it on and get 10 friends, accomplices, vagabonds, really anyone, to book a ticket. Not a bad deal for all concerned - 20% for the hangers-on and a free ticket if enough "friends" actually book some tickets.

So, have at it. And if you want to be my friend and save 20% on Virgin America, click here and enjoy.

Tuesday, October 27, 2009

Priceline Negotiator Trades Phasers for an iPhone

Priceline.com launched a cool new iPhone application today that not only functions well but is also really fun. Finally, a great app from an established company that also has some whimsy. Priceline is obviously serious about mobile bookings but isn't taking themselves too seriously with this app - we like that.

Most importantly, this isn't just a re-skin of the regular Priceline website crammed down to fit on a small screen - The Negotiator app is actually a different experience tailored for the iPhone and a fun one at that - the music between the screens adds to the fun.

Most fun is the "shake down" feature which leverages the iPhone's location functionality to display winning bids nearby. Shake your iPhone and see what your options are - perfect for last minute bookings and much more useful than a randomized restaurant listing!

It is also easy to toggle between "Name Your Own Price" hotels and regular, published hotels through a tabs at the bottom of the screen labeled "Negotiate" or "Browse." When "negotiating,"
the app allows users to perform Priceline bidding functions with some nice touches for choosing your bid amount like a recommended price to bid, and a slider to increase or decrease the bid with great tag lines like "See if you can bag this deal, too!"

And because you can book up until 11PM for same day arrival, we bet more than a few travellers who find themselves stuck in a city for whatever reason (you can think of a few, I'm sure) will love this app. Priceline has long allowed for same-day bookings but firing up your laptop for a last minute room isn't exactly a lot of fun - Priceline has created an elegant and fun solution.